The Rationality of Cronyism

By Christopher Powers
STATESMAN SENTINEL
December 3, 2011

It has become more and more apparent to seemingly everyone of late, that the American economic system is not based on capitalism, but a twisted hierarchical system of special interests and government favors commonly known as “crony capitalism.”

The distinction is very important, because crony capitalism in America – especially during the last century – created a toxic environment that has only recently spilled over into the mainstream understanding of the economy, but has long been under the surface, guiding the tides of public policy.

Crony capitalism grows out of an environment where policymakers focus so much on striving to make their country “productive” and they listen so intently to the pleas of special interests, that legislation is nothing more than government sanctioned monopolization, subsidization, or wealth redistribution to “encourage” a productive economy, or to make the economy more “fair.”

Take a piece of legislation from recent history: Obamacare.  Under this health care overhaul, the American people are forced by threat of fees and taxation, to buy health insurance from private companies.

Another example can be clearly seen in the American Recovery and Reinvestment Act, which gave large sums of taxpayer money to companies that politicians hoped would have a positive impact on employment and economic growth.

Agriculture, the military-industrial complex, the financial industry, energy firms… These are all areas of the economy that are under heavy regulation and supervision, and they are – unsurprisingly – all industries that are rife with crony capitalism, special interest lobbying, and government favoritism.

The common complaint is that crony capitalism is unfair because it involves the government picking winners and losers.  This gets to the core issue of why crony capitalism is a bad model, but the problems run deeper.  Cronyism complicates the market as a whole, because it undermines free market rationality, creating a dependency on government help to merely stay relevant and competitive in the market place.

Koch Industries has become the villain to the progressive American left because its owners, Charles and David Koch, helped start Americans for Prosperity, and are now seen as the “funders” of the Tea Party movement.

After Koch Industries was accused of benefiting from ethanol subsidies, which the brothers have spent millions lobbying against over the years, Charles Koch wrote a very effective piece discussing their reasoning for accepting subsidies.

“Because every other company in a given industry is accepting market-distorting programs, Koch companies have had little option but to do so as well… our refining business is essentially obligated to be in the ethanol business.”

The key subtext here is: rationality.  The government skews the market by undermining free and equal competition, by engineering the economy to be productive in an “acceptable” way.  If one hopes to make it in the energy business, they must embrace subsidies and regulation in order to survive.

As more and more regulations pile on, it becomes harder and harder for new companies to become involved in these industries.  It becomes even harder for those companies whose leaders are hesitant to accept success at the cost of the taxpayer.

Even people whose political views keep them skeptical of cronyism cannot and – in their mind – should not, keep themselves from taking a piece of the pie.

Robert Lutz, the former Vice-Chairman of General Motors Company, exemplified this perfectly in his recent interview with Charlie Rose.

“To a very large extent a lot of government regulation we had and the exchange rate that the US granted Japan after the war which gave Japan a $4,000 cost advantage, the fact that corporate average fuel economy was enacted… I tell myself, the government caused a lot of the problem, I don’t mind accepting government assistance as repayment.”

He explicitly said earlier in the interview that he does not believe in the government intervention beyond basic regulation, but he emphasizes that government interference in the car industry made it legitimate for the government to bail out General Motors.  Regulation and cronyism creates such a twisted environment that bailouts are not only seem acceptable and necessary, but are actually deserved.

Crony capitalism is so rampant and blatant – as can be seen with all of Bush’s and Obama’s major initiatives – that a truly free market economy seems impossible to grasp.  It has become almost a dream, an illusion of what America could have been in a perfect world.

But this dream is attainable as long as people appreciate the power they have over their own lives, and become more skeptical of the desires of politicians, corporate heads, and bankers, who try to perfect the world using central planning and government coercion.

Christopher is a graduate from George Mason University, where he received his BA in Economics. He has worked in financial and broadcast journalism. He currently lives in northern Virginia.